Learning from Retail's Wage & Hour Day of Reckoning

In every burst of an economic bubble you find where legitimate profits were made, where smoke and mirrors substituted for profits as in the Bernard Madoff scandal, and where profits were made by short-cutting laws and cheating honest people. To quote Warren Buffett, "Its only when the tide goes out that you see who's swimming naked."

The naked truth behind double-digit retail profit growth was unmasked this week for two major retailers. A huge wage and hour settlement at Wal-Mart (estimated at $350 - $620m) and the upholding of a $35m judgement against Family Dollar indicates that both companies engaged in wage and hour fraud and cheated low-wage employees out of earned wages.

I'm a pro-business guy and these companies are customers of ours, but this is justice long overdue. In the Wal-Mart case lawsuits had erupted in multiple states claiming the same offense; hourly workers forced to work without breaks and lunches and compelled to clock out at the end of their shifts and go back to work. Other than blatant safety violations, this is about as low as a management team can go in the business world.

Remember, those making the decision to force workers to engage in this activity are much more highly paid and are in essence stealing earned wages from low-wage, often minimum-wage workers and giving that money to a multi-billion dollar company. The fact that Wal-Mart faced not just multiple lawsuits, but multiple class-action lawsuits in multiple states suggests how widespread the practice was for the nation's largest retailer. Company spokesmen denied the allegations right up until they settled, now stating that Wal-Mart is "no longer the company we once were."

The Family Dollar case is similar. This retailer operates small Dollar General type stores in small communities. In this case the Store Managers were actually found to be misclassified hourly employees. Their duties were 80 - 90% stocking shelves, running the cash register, and cleaning the store. They had no authority to hire employees; they didn't even have the authority to recommend employees to be hired. True authority rested with the District Managers. Working 60+ hours per week, the $35m settlement is for unpaid overtime, lunches, and punitive damages.

Both of these companies have HR departments, and both have Legal departments. Unless both departments in both companies are intimated and ineffective, the presence of such wide-spread wage and hour violations suggests a conscious decision somewhere in the upper levels of management to cheat low-wage employees. Of the four "sins that cry to heaven" this represents two: Injustice to the Poor (Exodus 2:32) and Defrauding a Workman of His Wages (James 5:4). It will be interesting to watch both companies' profits and behavior going forward to see if they will turn from these practices (and if so, can they maintain their earnings) or continue to attempt to skirt the law. If the latter, watch for increased union organizing activities as the pro-labor Obama Administration takes over next month.

For other companies and their management these cases should serve as a warning. If these two companies with well-financed legal resources can't get away with this, you can't either. Clock-in/Clock-0ut discipline, hourly classification guidelines, and meal/rest-break regulations are old-school, unsexy, and fundamental to operating within the law. Trying to get around them is only successful for so long, and not worth the risk.